Midwest Economy Blog

Midwest Auto Suppliers at a Critical Crossroads

April 27, 2006

In regard to the economy, everyone associates the Midwest, especially Michigan, with the Big Three automotive nameplates of General Motors (GM), Ford, and Daimler-Chrysler. Also, most everyone is aware that the Big Three are closing some of their assembly plants, where finished vehicles are produced, in part because they are losing domestic sales to other international assembly companies. But the more acute threat to the Midwest economy comes not from assembly plant shutdowns but from the possible retrenchment in the region’s much larger auto supplier industry—the subsector that produces automobile parts for the assemblers. Automotive suppliers are the lesser known part of the auto sector, even though they employ three to four times as many workers as assembly operations. Today, many Midwest automotive suppliers are operating in bankruptcy or are under severe stress due to their current business environment. To assess the industry’s prospects, the Chicago Fed held a conference on the changing geography and business environment for auto suppliers on April 18–19 at its Detroit branch. Presentations from the event are now being posted on the Bank’s website.

Why are so many Midwest supplier companies beleaguered? There are several factors, including the rising costs of inputs, the restructuring of the traditional assembler–supplier relationships, a shrinking customer base, high labor costs, and heightened import competition.

Most generally, the role and tasks of many supplier companies have become more complex. As Michael H. Moskow stated in his remarks opening the conference, “traditional carmaker–supplier relationships are rapidly changing. Today, assembly companies are requiring more from their primary suppliers in terms of product design, engineering, and cost. But some assemblers and suppliers are finding it difficult to achieve the cooperative relationships now required to produce popular, high-quality vehicles.”

In this regard, some suppliers reported that their relationships are better with some of the new international carmakers than with the Big Three. Representatives from Ford and GM acknowledged that supplier relations have not been as strong as desired and outlined efforts being made to improve their supplier relations.

According to Michael H. Moskow, another challenge “is that many suppliers, particularly in the Midwest, are losing business because their Big Three customers continue to lose market share to foreign nameplate manufacturers located in other regions of the United States, especially the American South. The flipside to this, of course, is the opportunity for suppliers to increase sales to the foreign manufacturers who are producing an ever higher number of vehicles in the U.S. But the transition to new customers may be a formidable challenge for many suppliers. New customer relationships take a long time to build, and the costs of relocating operations closer to new customers or servicing these customers from distant production facilities can be significant.”

In reflecting on the new geography facing Midwest suppliers, Jim Rubenstein and Thomas Klier illustrated the heightened challenge that Midwest suppliers face in transporting parts from Midwest locales to the emerging auto assembly belt. Between 60%–65% of both assembly and parts plants remain in the Midwest today. Yet, assembly plant locales are shifting to the South (from 5 plants in 1979 to 15 today), pulling parts production along. Recently, the “pull” southward on parts production by assembly plant relocation places even greater pressures on Midwest parts suppliers. In particular, there has been a further southward drift in assembly capacity in recent years, well beyond the mid-south locations in Kentucky and Tennessee that were established during the 1980s and early 1990s. As illustrated by Thomas Klier and Jim Rubenstein in the slide below, for some particular types of auto parts, the increased shipping distances from the Midwest make for difficult “one-day delivery” times that are often desirable.

Map showing distance between Ontario and the Upper South is close to 1000 miles

Many Midwest suppliers are also being challenged by import competition. The nominal value of direct imports ofmotor vehicle parts to the U.S. has more than doubled over the past decade, increasing from $37 billion in 1995 to $84 billion in 2005. So, too, indirect and unobserved parts imports have also climbed in all likelihood. One-half of the loss of Big Three market share since 1995 has come from increased imports of assembled autos. Many of the parts in those same autos were produced abroad as well.

Finally, some Midwest supplier companies are at a competitive disadvantage to both overseas supplier plants and some domestic supplier plants in other regions with respect to wage and benefit compensation, working arrangements, and legacy costs. In response, management-labor relationships are being successfully restructured in this industry. JCI and Metaldyne are examples of supplier companies that have successfully introduced competitive business environments in cooperation with the United Auto Workers, the industry’s major labor union.

Based on such successes, the conference participants hope and cautiously believe that the needed transitions to create a stronger business environment for the Midwest automotive industry will come to pass. Also, they maintain, there are a number of reasons why Michigan and the surrounding areas will remain an important location for the auto industry. These include the region’s abundance of skilled workers and associated training programs; a well-developed infrastructure for logistics and transportation; and a still dominant and highly concentrated network of materials suppliers, research and development, and parts producers—all of which make up the world’s most productive automotive region.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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